A pseudonymous blog about Canadian law and politics.
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Monday, July 14, 2014

A.G. Quebec v. Queen Insurance Company -- Thumbs up

Stamp taxes, legitimacy of enactment thereof. Some countries fight world-historic revolutions and found entire civic religions on the iniquity of imposing them without clear constitutional authority. Others relegate these issues to cases so obscure they don't have their own Wikipedia entry. But we got Mounties, Moose and Molson. So there.

It is sometimes thought that innovation and creativity do not mix with government work. Whatever the merits of this stereotype in the provision of public services, it has never been true at the treasury. Governments from the Tudors to today have been willing to give their right brain all the permission it needs to get freaky when coming up with new sources of revenue, especially revenue that can be characterized as something other than a tax.

The British North America Act restricted the provincial tax power to "direct taxation" (s. 92(2)). But they were also given power over "Shop, Saloon, Taven, Auctioneer, and other Licences in order to the raising of a Revenue..." (s. 92 (9)). In 1875, the legislature of Quebec got the bright idea of requiring a licence to sell insurance legally in Quebec, the only term of which was that the licensee remit a portion of premiums collected to the provincial fisc.

The Judicial Committee easily saw that this was in fact a tax, not a licence, and an indirect one. The real difficulty was in the line drawing, which the Committee did not do perfectly.

Tax, licence: what's the difference?

Quebec's scheme did not provide for any fixed cost for the "licence." All the payments were based on the revenues of the insurance company. Judah Benjamin was once again Quebec's lawyer, and he pointed to other licensing schemes in the Empire in which the amount paid for the licence depended on the amount of business done. The Committee agreed that this was a good approach (important!), but thought there was a big difference between a licence fee based on past experience of the profits or revenues associated with the licence, and a "fee" that just was a share of those profits/revenues.

As a way of disposing with the particular case, this worked. But the line is inherently subject to manipulation by the government. The Privy Council introduced an important methodological point by saying that when considering what kind of statute constituted a licencing scheme, the judges should look at how other licencing schemes worked at the time. But formalism does seem to rule here. This area cries out for an economic analysis that nineteenth century judges were good at intuitively, but did not have the theoretical arsenal to express.

We have since moved to the principle that licence fees should be proportionate to the costs imposed on government by the licensing industry. This does cut back on the phrase "in order to raising a Revenue..." since cost-recovery is not really raising a revenue. The solution would depend on looking for actual scarcities that lead to rents that the province should be allowed to use to fund public services. A modern example (although familiar in certain contexts at the time) would be selling a licence to use up some of the assimilative capacity of the environment. There is a finite limit to how much capacity there is, so the government should be able to charge the competitive price and use the resulting revenue.

Direct vs. indirect taxation

On the question of what constituted "direct taxation", the Committee was prepared to go to social science (which in this case meant Mill's political economy). I hate to bring this up for two reasons:

My law professors told me that using social science was invented in the 1970s by the judges they approved of (Laskin and Dickson).

The direct vs. indirect taxation distinction does not really work as a matter of economics. That's because it is supposed to be about who bears the ultimate incidence of the tax. If it is the same person as the legal payer, then it is a direct tax; otherwise, it is an indirect tax. But the marginal revolution in economics ultimately revealed that this depends on the elasticities of supply and demand, which could change while the legal form of the tax remained the same. The constitutionality of the tax couldn't really depend on changes in preferences and technology that left the law the same. So we got a lot of confusion. The real point should have been to require the provincial governments to be as transparent to their voters as possible about the costs of taxation. That is actually more-or-less what happens, but it would have been better not to bring social science into it.

Still, the JCPC struck down a law for the first time when that law was well worth striking down. Thumbs up.